In an opinion released earlier this month, the United States Court of Appeals for the Seventh Circuit held that a self-insured health plan was not entitled to a refund of the nearly $1.7 million it paid to two Wisconsin hospitals for treatment administered to a participant’s newborn child, despite the plan’s ultimately concluding the newborn was never eligible for coverage. Writing for the court in Kolbe & Kolbe Health and Welfare Benefit Plan v. Medical College of Wisconsin, Judge Posner explained a participant informed the plan of his daughter’s serious medical condition on August 2, 2007, but the participant did not submit a form containing information that would allow the plan to determine the daughter’s eligibility for benefits. When the participant did submit the form, he failed to answer a number of questions germane to establishing his daughter’s eligibility. Nevertheless, the plan paid for the daughter’s treatment until June 24, 2008, at which point the plan determined the child was not covered. After deciding the daughter was not eligible, the plan demanded a refund of the amounts paid on her behalf from the hospitals. When the hospitals refused, the plan sued on the grounds that the hospitals’ refusal constituted a breach of the provider agreements between the plan and the hospitals.
The plan acknowledged that the provider agreements were silent on refunds, but argued the agreements contained an implicit term requiring the hospitals to provide a refund under the circumstances. According to the plan, the court should read such a provision into the agreements because it is customary for employer health plans to receive refunds from hospitals when the plan discovers, after the purported beneficiary has begun treatment, the purported beneficiary is not, in fact, eligible for coverage. Judge Posner agreed, as a general principle, implicit contract terms are enforceable if needed to make the explicit terms of an agreement conform to the parties’ reasonable expectations, but found the plan’s contention, that refunds given under similar circumstances in the past created an implied contract term, in this case wanting. Here, because the hospitals were “faultless” and the payment of refunds in the past “could not have lulled the Kolbe plan into thinking it took no risk in conducting a dilatory investigation into the eligibility of a child with a very serious medical condition bound to cost a great deal to treat,” Judge Posner declared that to infer the provider agreement contains an implied refund provision “is to infer absurdity.” Consequently, the court denied the plan’s claim.
The outcome of this case serves as a warning to plan sponsors of the dangers of failing to make eligibility determinations quickly. Plans should ensure that their dependent eligibility provisions are carefully drafted and that the procedures used to verify dependent eligibility are communicated to participants. Those plans that require participants to provide the plan with information to verify the status of a dependent should explain these requirements in the plan document and summary plan description and should ensure that they have internal processes in place to review submitted documentation promptly. Plans may also wish to ensure that their provider agreements contain explicit provisions for refund or offset when plans determine that coverage was improperly extended. These actions will help minimize the amounts ultimately paid by plans for ineligible dependents.